Powering demand: Solar photovoltaic subsidies in California

Households' decisions to purchase solar photovoltaic systems are characterized by large upfront costs, differentiated products, and uncertainties about future government subsidies. This study analyzes the interplay of these factors using a dynamic discrete choice model. I use a newly assembled dataset, that covers all installations from 2002 through 2006 in California at the household level, to estimate demand for solar panel installations. I find that across the distribution of housing values, households are price elastic with respect to both temporary and permanent changes in price. Also, I find that elasticities vary across the distribution of housing values. The marginal effect of technological innovation is significant and positive with respect to the probability of purchase. I find that a 1% increase in the efficiency rate increases the probability of purchase by 6.4%. This is result is compounded by the fact that efficiency rates increase 30% over the sample period. Through counterfactual simulations, I show that in the absence of government subsidies 49.5% of all purchases would not have occurred. Additionally, over 70% of the total reduction in market capacity when subsidies are removed is directly attributable to larger capacity installations. Lastly, I find no evidence that household behavior is affected by the uncertainty associated with future subsidy regimes.